Economies of Scale

As our technology has improved, many businesses have experienced economic savings.   Certain tasks are easier to perform, information is easier to access, more can be done in a shorter period of time.  Real estate commissions seem immune to these economic savings.    Even in the Mercury News Action Line (11/11/2007), the comment from agent is that he  cannot afford to market a property for less than the agents typical 3% of the commission.

This is certainly not because of a lack of technology in our industry.  Instead, real estate agents now have the MLS on-line.  We can use on-line contract forms.  We can communicate with our escrow officer and loan officer via e-mail.  And, if we want to, we can even set up escrow coordination software that can be shared between the real estate agent, client, lender and escrow.  In addition, many agents carry PDAs that are e-mail and web capable allowing immediate knowledge and response to all of the agent’s e-mails as well as immediate access to the MLS in the field.

Why don’t all of these technological advantages translate into lower costs for the agent and, as a result lower commissions for the sellers?

It’s simple.  There is no economy of scale.  Unlike a large company that would provide similar technology to all of it’s employees and negotiate the best price possible for this equipment, each real agent is required to purchase his or her own equipment.  And although some real estate companies and NAR do negotiate discounts, the discounts that can be negotiated are based on an unknown number of sales.  These discounts are not as aggressive as they might be if the entire purchasing power of a company was being negotiated.  And, certainly, the incentive for the real estate companies and NAR to get the best possible deal is minimal.  Offering a reasonable discount is enough.  It’s certainly a better deal than the agent would get on his or her own.

As far as the company providing the product, it knows that it must deal with thousands of agents, thousands of separate purchase orders and separate billing, thousands of customer follow ups and questions.  So certainly whatever deal they offer to the real estate companies or NAR isn’t going to be the same deal they would offer a single, large, bulk purchaser.  They can’t.  There is no economy of scale for the selling company either.

This lack of economy of scale pervades everything real estate agents do.  Each agent orders his or her own promotional materials.  Pens, notepads and any other promotional material need to be in each agent’s name.  (By the way, if you need any notepads, let me know.  I have quite a few left.)  Advertisements are purchased by individual agents, so any discounts that might be available to mass purchasers are not available for real estate agents.  There is no coordination of efforts or areas, so each agent must be able to handle all the transaction questions as well as all the purchasing questions.  Each agent must know the houses where the client is looking instead of managing all of the purchases and sales in a certain area for a real estate company.

Can you imagine what life would be like as a real estate agent if you only needed to know one area, if you didn’t have to coordinate everything, if there was someone to ask questions to, get advice from and support you, even if that just meant answering the phone and taking care of the solicitation calls we all get.

You would actually be allowed to learn your craft, do the thing that you are best at.  So you don’t like analyzing Homeowner Association Documentation, there’s someone in your company who takes care of that.  You have a client who wants to sell a property in Fresno.  Again, there’s someone who takes care of that.  (You don’t have to drive to Fresno to hold open houses and possibly get clients that will continue to force you to drive to Fresno.)

In return, of course, there needs to be some fair method of compensation.  Now, there’s the rub.

© 2007 by Judy Kane